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Data Center Power Purchasing: Don’t Be a Price Taker

Most data center operators make power buying decisions 30 to 90 days before their current power contract expires, and that’s exactly the wrong thing to do, according to Cara Canovas, sales director at Noble Americas Energy Solutions. That’s the best way to become what she called a “price taker,” meaning you’ll be forced to agree to whatever the energy provider says the market price is at the moment, since you won’t have time to devise an intelligent power purchase strategy.

Canovas explained the fundamentals of data center power buying at this week’s Data Center World conference in Las Vegas. Data center operators don’t have to be price takers, but it takes a fairly complex series of decisions to avoid and requires some long-term planning.

But it’s worth taking the time. Data center power costs typically comprise 28 percent to 30 percent of the total cost of running the facility, she said. A sound power-purchase strategy can give you a competitive edge and protect you from the risk of swings in commodity prices.

One caveat: you can only do this in total of 17 states in the U.S. at the moment, according to Canovas. Those are states with deregulated power markets. Regulations dictate energy prices in the rest of the country, and those are the prices you’re stuck with if you have facilities in one of those states. You can see a map of deregulated states here.

It's All About Risk Management

Buying power is a lot like buying insurance, Canovas said. You don’t want to overpay, but you also don’t want to end up under-insured, which may at some point lead to massive costs. It is possible for your power prices to double year over year, if you haven’t built in any hedging mechanisms into your strategy.

Like with insurance, power-buying decisions rely a lot on understanding and managing risk. “It’s really knowing your company’s risk profile, and how much risk they want to take on,” she said.

According to Canovas, a successful power-purchasing plan has to answer these four questions about risk:

Are we protected from a potential run-up in the market?

Are we positioned to benefit from price dips in the market?

Are we able to adapt to changes in consumption?

What term should we buy and why?

The Basics

No purchasing plan can be made without understanding fundamentals of what makes up the price of power. The basic equation is heat rate x price of natural gas + other charges, Canovas said.

Heat rate is a measure of efficiency of a power plant, and the lower the rate the better the efficiency. Wood’s heat rate, for example, is 15; coal’s is 10. Natural-gas and nuclear plants are most efficient: eight and six, respectively. Nuclear is “pretty darn efficient,” she said, but it has gone out of fashion in the U.S.

The price of fuel that goes into the consumer’s price calculation is based on gas prices on the commodity futures exchange and varies based on trading location.

Other costs include things like line losses, ancillary charges (costs to move power around), and independent system operator fees. About 85 percent of the power price is power itself, and the rest consists of the other costs, Canovas said.

Timing is Key

With all of this in mind, the price of power ultimately depends on location, term of use, and time of use.

Time of purchase is extremely important. On one chart Canovas showed, the difference between buying 10 megawatts in one location in January 2014 and buying it in the summer months was close to $1 million. If you wait until the last minute to renew your power purchase contract, you won’t have the luxury of deferring the purchase by a few months.

Power providers usually have a curve of historical power prices and future projections. The rates they offer to customers are usually based on that curve.

Each provider’s curve is proprietary information, so a customer that doesn’t want to be a price taker needs to be aware of the variables that make up that curve.

The bottom line is sound data center power purchasing is a complex decision-making process that can make a huge impact on the company’s operational expenses. It is much better to have some control over your power costs by taking the time to go through that process than rolling the dice and being a price taker.